Alternative asset managers hit by market decline

AmyOr

TAKING THE PULSE: Alternative asset managers are feeling the heat as global economic headwinds from the ongoing European sovereign debt crisis and concerns over slowing growth in emerging economies like China have caused a pullback in the global equities market. The Standard & Poor's 500 index declined 3.3% in the second quarter.

Economic net income for firms--a performance metric private equity firms and analysts use as it includes unrealized gains and employee compensation while removing the distortion from initial public offering-related charges--is likely to be dragged lower by markdowns in portfolio companies' valuations and lackluster performance in other strategies, like hedge funds. The modest pace of investment exits, as a result of capital market volatilities, is also likely to keep distributions at bay.

Analysts have recently slashed earnings forecasts for some firms on broad market declines, but they said these alternative asset managers are poised for a brighter outlook as any improvement in the capital markets would boost valuation and increase prospects for monetization of gains.

Wall Street Expectations: Analysts polled by Thomson Reuters recently expected an economic net income of 16 cents a share on $660.10 million in revenue, compared with 63 cents a share and $1.3 billion, respectively, a year earlier.

Key Issues: Mild decline in the private equity giant's private equity portfolio is likely offset by its management fee and transaction fee income. Real estate, which accounted for a quarter of the firm's $190 billion assets, is expected to be largely flat, as are its hedge fund of funds operations. Fundraising momentum remains strong on its latest real estate fund, and other credit and hedge fund programs.

Wall Street Expectations: Analysts polled by Thomson Reuters recently expected an economic net income of 12 cents a share on $190.63 million in revenue, compared with 36 cents a share and $195.7 million, respectively, a year earlier.

Key Issues: Strong gains in KKR's publicly-traded holdings--including follow-on offerings at Dollar General Corp.
CG, -1.66%
and Kinder Morgan Energy Partners L.P.
KMP, +3.23%
-- are likely to more than offset modest markdowns in its private portfolio. During the quarter, KKR had much traction in attracting new capital, having raised $2.25 billion in infrastructure, natural-resources funds and more than $3 billion for its second Asia-focused fund.

Wall Street Expectations: Analysts polled by Thomson Reuters recently expected an economic net loss of 10 cents a share on $105.36 million revenue. As the company was only listed on the Nasdaq Stock Market in early May, there is no year-earlier period for comparison.

Key Issues: Carlyle is truly diversified with its 94 active funds and 63 fund of funds, which includes 200 portfolio companies and nearly 300 active real estate investments. The broad suite of products allows it to better weather down markets. The firm said earlier this month that the combined value of funds from which it shares a portion of profits dropped by 2% in the second quarter, led by a 5% decline in the value of the firm's energy investments and a 2% fall in buyout funds. During the quarter, it has six follow-on offerings--the most among listed peers.

Wall Street Expectations: Analysts polled by Thomson Reuters recently expected an economic net loss of 22 cents a share on $72.53 million loss, compared with a profit of 31 cents a share and $308.9 million, respectively, a year earlier.

Key Issues: Funds are expected to post negative returns. Markdowns with its Fund VI may preclude Apollo from distributing its share of profit until valuations rebound. The firm, co-founded by Leon Black, also has announced some management changes: Former Barclays Capital executive Martin Kelly has been named as chief financial officer, replacing Gene Donnelly; and global head of real estate Joseph Azrack may transition to be chairman of the real estate business next year.

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